Getting Paid on Construction Projects Before Bankruptcy

In the current financial crisis, prompt payment on construction projects will be increasingly difficult during the last quarter of 2008, and into 2009.

If an owner or contractor is not timely paying invoices, there are concrete steps that can and should be taken to protect your interests, before you receive notice of the customer’s closing or a bankruptcy filing.

When the economy was robust, small businesses had the luxury of overlooking overdue accounts receivable. Earnest collection efforts would not start until there was an internal cash flow bind. In this market, that luxury will no longer be afforded. Good credit and collection policies put in place now, and followed, can insulate a business from spending time collecting or from participating in a customer’s bankruptcy.

First, there are some basics that can protect a creditor faced with a slow paying customer. First, see what you have in your credit file. Do you have a complete credit application that contains a personal guaranty of one or more of the principals of the business so that if the business files a bankruptcy, there will still be an individual responsible for the debt? (In most cases, a creditor may continue to collect from a guarantor of a bankrupt business.)

Second, recognize the warning signs. Review aging summaries frequently.  How long has the customer been in business? What are the customer’s payment terms with other businesses? Are you receiving full or partial payments? Do you hear the “check is in the mail”? Alternatively, has the customer stopped buying from you or cannot be reached? The older the receivable, the harder it will be to collect.

Third, recognize that many states have very strong mechanics lien statutes. Under certain circumstances, in some states, a mechanics lienor can be paid ahead of a lender that has a prior recorded mortgage on the property.  Those who properly file mechanics liens, whether they can prime the lender or not, have a much greater chance of ultimate payment than those creditors who sit on their rights or let a mechanics lien deadline go by-and once the mechanics lien deadline has elapsed it can never be revived. The better practice in approaching your accounts receivable in the construction industry is almost always to insist on your mechanics lien rights.

With the mechanics lien in place, if the customer says that it cannot pay, you may press forward on your lien, or do any of the other things that you would have done to negotiate with the debtor-work out a partial payment, a structured payment plan, get additional security, or set up payment with a credit card.

This is also a good time to correct any bad habits that were developed in the better economic times. The beginning of 2009 is a great time to look at your credit applications to make sure they are current and accurate, and have the protections you need to be successful in the next year.

Face it; collections are often avoided as one of the more unpleasant tasks to be performed in the office. It is not welcomed by either party. Many businesses fear that by playing tough on the collection front, they may lose a valued customer to competitors. But consider the impact of non-payment, time spent on collecting and a bankruptcy on the bottom line. In this time of economic instability and failing businesses, your business depends on prompt payment for your services and goods.

Wendy J. Paradis and Michael R. Bosse are attorneys in the Portland, ME offices of Bernstein Shur who regularly work for construction entities. Both are graduates of the University of Maine School of Law. They can be reached at 207.774.1200.

Construction Business Owner, January 2009